DEMARCHE ON GAMBLING - WTO ARTICLE XXI PROCEDURE

UNCLAS SECTION 01 OF 04 STATE 165472

SIPDIS

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ECON ETRD WTRO
SUBJECT: DEMARCHE ON GAMBLING - WTO ARTICLE XXI PROCEDURE

REF: STATE 60296

SENSITIVE BUT UNCLASSIFIED ENTIRE TEXT. PLEASE PROTECT
ACCORDINGLY.


1. This is an urgent action request. See paragraphs 14 and

15.

SUMMARY
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2. In May 2007, the United States began a process to clarify
that its WTO obligations do not extend to gambling and
betting services, in response to a WTO dispute settlement
finding that the U.S. inadvertently included this subsector
in its commitments. The EU has identified itself as a WTO
Member whose interests would be affected by this
clarification; accordingly, the U.S. has entered into
negotiations for a "compensatory adjustment" to include
additional services activities in the U.S. WTO services
commitments. Although the U.S. has made a compensation offer
which exceeds the value of the U.S. market for gambling and
betting services, the European Commission, citing pressure
from EU Member States, has not yet accepted the offer. As
discussed below, Posts are asked to contact appropriate host
government trade officials to inform them of this action and
to encourage them to contact the Commission to urge the EC to
accept the U.S. offer and avoid arbitration. The deadline
for negotiations is December 14, after which the EU will have
45 days to consider whether to seek arbitration. Posts are
requested to deliver this demarche no later than Wednesday,
December 12. Please slug responses to EEB/TPP/MTA Carol
Henninger and USTR Thomas Fine.

THE GAMBLING PROCEEDING
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3. Pursuant to a WTO dispute settlement procedure initiated
by Antigua and Barbuda in 2003, the WTO Dispute Settlement
Body (DSB) has adopted an Appellate Body report that
concludes that the commitment scheduled by the United States
during the Uruguay Round under the General Agreement on Trade
in Services (GATS) to provide market access to foreign
service suppliers of "other recreational services" must be
construed to include gambling services, such as Internet
gambling services provided by companies located in Antigua.


4. Although the United States had argued during the case
proceeding that it had not intended to give up its
longstanding federal prohibition and criminal penalties with
regard to interstate (i.e. cross-border) gambling, the Panel
found that the United States, albeit unintentionally, had
committed to allowing market access for Internet gambling.
The Panel further found that the United States had failed to
rebut Antigua's argument that U.S. criminal laws governing
gambling on horse racing discriminated against foreign
operators. The WTO Appellate Body upheld these findings.


5. Since May 2007, the Gambling dispute has been progressing
on two tracks. First, because the WTO has ruled that the
United States has not brought its anti-gambling laws into
compliance with the WTO panel ruling, Antigua requested
permission to impose 3.4 billion USD, per annum, in
retaliation in the form of suspended TRIPs and
telecommunications obligations. This request has been
referred to arbitration under WTO dispute settlement
procedures. A decision of the arbitrator is currently
scheduled to be issued on December 14.


6. Second, in light of the WTO dispute settlement findings
and concern about other WTO Members bringing similar
challenges to U.S. federal and state gambling laws, in May
2007 the United States invoked Article XXI of the GATS, which
establishes a process for WTO Members to modify or withdraw
their schedule of services market access commitments. (See
REFTEL) The modification would correct the U.S. GATS
schedule in order to reflect our original intent to exclude
gambling from U.S. commitment on recreational services. By
using this procedure, the U.S. is attempting to resolve not
only the complaint and possible retaliation by Antigua, but
also to forestall potential future disputes on this issue.


7. GATS Article XXI provides that when other WTO Members
allege to be affected by a proposed modification, the Member
invoking Article XXI and those other Members should
negotiate a "compensatory adjustment" (i.e., new services

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market access) to other areas of the GATS schedule. Seven
WTO Members notified the United States that they consider
that their interests would be affected by the proposed
change: Antigua and Barbuda, Canada, Costa Rica, the EU,
India, Japan and Macau (NOTE: Australia initially filed such
a notice, but subsequently withdrew. END NOTE). The period
of time to negotiate the compensatory adjustment has been
extended twice by mutual agreement, and will expire on
December 14.


8. During the summer 2007, USTR met with the claimants on
several occasions. USTR made clear during these
consultations that the United States did not believe that its
action to clarify its GATS schedule with regard to gambling
and betting services should warrant compensation since it
never intended to make such a commitment and no WTO member
had bargained for it during the Uruguay Round. The U.S. also
noted that the subsector affected by this modification (i.e.,
gambling) involves issues of public morality, law enforcement
and protection of minors. However, the United States
indicated that it shared the systemic concerns expressed by
the EU and a number of other claimants about setting any
precedent that might encourage misuse of Article XXI by WTO
Members. The United States therefore agreed that in order to
address the overall systemic concerns, it would make an offer
for compensatory adjustment.


9. In September, the United States offered to provide new
market access commitments in the sectors of storage and
warehousing services, and technical testing and analysis
services. Although Canada and Japan accepted this
compensatory adjustment offer, other claimants, including the
EU said that in their view it was not commensurate with their
claims. USTR continued to meet with the claimants to discuss
the matter. In December, USTR increased its offer by
proposing to bind research and development services, a sector
which alone is significantly larger than the entire U.S.
gambling industry, and is an EU priority sector in the
ongoing DDA GATS negotiations.


10. Although the EU itself has not taken a commitment for
gambling under the GATS, and gambling is restricted to
various degrees in most EU Member States, the European
Commission has taken a very aggressive stance in these
negotiations. That stance perhaps reflects lobbying by the
European Internet gambling industry, largely based in the UK,
but with a significant presence in Malta and Gibraltar as
well. That industry has been pushing very visibly for a
change to U.S. laws prohibiting Internet gambling. This
issue continues to be very divisive in the U.S. Congress.
Consequently, no changes in federal laws affecting Internet
gambling are anticipated in this Congress.


11. The European Commission position in this case may also
reflect concerns about national restrictions within the EU on
Internet gambling which may discriminate against providers of
gambling services from other EU Member States. Since 2006,
the Commission has inquired about or formally requested a
change to gambling legislation in: Austria, Denmark, Finland,
France, Germany, Greece, Hungary, Italy, the Netherlands, and
Sweden.


12. In a recent meeting with European Commission Director
General for Trade David O'Sullivan, Deputy U.S. Trade
Representative Veroneau explained that the sectors we are
offering to bind represent a very generous economic offer
which would not be further increased. Mr. O'Sullivan was
also reminded that the U.S. obligation with respect to
gambling results from a drafting error, and thus these
negotiations are a windfall to the EU. Nevertheless, Mr.
O'Sullivan suggested the offer was insufficient, citing, as
he has in the past, views of EU Member States.


13. If the United States does not reach an agreement with
the EU by December 14, the Commission will have 45 days in
which it may request arbitration. In order to do so, it will
need to seek authorization from the EU Member States through
the 133 Committee.


Action Request
--------------


14. No later than Wednesday, December 12, Posts are
requested to convey the points in paragraph 16 to appropriate
host government trade officials responsible for providing 133
Committee instructions: 1) to inform them that the United
States has made a very substantial and generous economic
offer in services sectors of special interest to the EU, 2)
to remind them that this case arose because of a drafting

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error, not because of withdrawal of a negotiated commitment,
and 3) to explain that the United States would view a
decision to seek arbitration in this matter as gratuitous and
inappropriate. Member States should be urged to contact
European Commission trade officials as soon as possible to
encourage the EC to accept the U.S. offer and avoid
arbitration.


15. Post should further note that many WTO member countries,
including some EU Member States, prohibit gambling and
betting activities whether through the Internet or other
means. We believe these countries should appreciate the
importance of maintaining WTO members' flexibility to
regulate in this sensitive area of public morality. The
decision of whether to open gambling markets should be done
through careful policymaking, rather than through litigation.


16. Background Points

-- On May 4, 2007, the United States notified the WTO that
it is invoking Article XXI of the General Agreement on Trade
in Services (GATS) to correct mistakes in the drafting of the
U.S. GATS schedule to clarify that the GATS market access
commitments do not cover gambling and betting services,
including Internet gambling;

-- The U.S. took this unusual action due to the fact that in
the course of dispute settlement proceedings, the U.S.
schedule was deemed to include a commitment on gambling, even
though this had not been the intent of the United States. In
fact, no WTO Member had requested such a commitment;
cross-border gambling had been and continues to be prohibited
under long-standing U.S. criminal laws; and the U.S. schedule
never even mentions the terms "gambling" or "betting."

-- Gambling is an area which raises highly sensitive issues
of law enforcement, public morality, and the protection of
minors and other vulnerable groups. Abolishing longstanding
U.S. anti-gambling laws was not an option, and the United
States accordingly has chosen the GATS Article XXI procedure
as the means to clarify its schedule and thus resolve the
dispute.

-- The U.S. shares the systemic concerns WTO Members have
expressed about the potential for misuse of Article XXI, and
have offered to make a substantial compensatory adjustment by
making new services commitments in other sectors. The WTO
system cannot function if there is no means to correct
errors.

-- The United States made an initial offer in September,
which was rejected by the European Commission. After further
discussions, in December we offered new commitments in
storage and warehousing services, technical testing and
analysis services, and research and development services.

-- These sectors represent far greater economic potential
(over 200 billion USD) than the most exaggerated estimates of
the entire U.S. gambling market. Further, the offered
sectors have all been specifically requested by the EU in the
Doha WTO negotiations, and they are sectors in which European
industry is well-positioned.

-- Nevertheless, the European Commission has stated that the
U.S. offer is insufficient, expressing concern that EU Member
States would not accept it. We have made a very generous and
substantial offer, which we believe more than compensates for
the clarification of the U.S. GATS schedule. These
negotiations are scheduled to conclude on December 14, after
which any claimant that has not accepted our offer will have
45 days to request arbitration.

-- The United States would very much prefer to avoid
arbitration in this matter. We understand that there is an
industry in the EU that is impatient to offer Internet
gambling in the United States. However, we urge EU
governments to bear in mind that no WTO Member asked the
United States to make a commitment for gambling and betting
services during the Uruguay Round, and as the dispute
settlement panel recognized, the United States never intended
to offer a market access commitment for gambling.
Furthermore, as the WTO Appellate Body recognized, gambling
raises serious social issues of law enforcement, public
morals, and the protection of minors and other vulnerable
groups, and its regulation is permissible under WTO rules.
Arbitration will not change that, and will not benefit the
European gambling industry.

-- We note that a number of EU Member States confront
similar concerns and maintain restrictions on Internet

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gambling. It is important to allow flexibility to regulate in
this sensitive area of social policy. The decision of
whether to open gambling markets should be done through
careful policymaking, rather than through litigation.

-- In light of the size of our offer, the fact that it
addresses specific EU requests, and the fact that the entire
issue arises from a drafting error, seeking arbitration will
be perceived in a very negative light as a gratuitous attempt
to gain a windfall from this difficult issue.

-- Should the EU reject our offer, we are confident that an
arbitrator will find that our offer meets the WTO requirement
to rebalance our services obligations. Our goal, however, is
to avoid unnecessary WTO arbitration. At a minimum, we are
urging the EU to refrain from joining any arbitration which
Antigua and Barbuda may request.

-- We urge your government to convey to the European
Commission support for accepting the U.S. compensation
proposal before December 14.


If asked about proposals in Congress to change U.S. law with
respect to gambling:

-- There are some in Congress who believe U.S. gambling laws
should be relaxed, and others who oppose such changes.
This difference of views reflects the disagreement in
American society about this sensitive issue. We cannot
predict where this debate will come out. We do note,
however, that just last year Congress strengthened U.S.
anti-gambling laws.

End background points.
RICE